v2.4.0.6
Pension, Retiree Medical and Savings Plans
 12 Months Ended
Dec. 29, 2012
General Discussion of Pension and Other Postretirement Benefits [Abstract]  
Pension, Retiree Medical and Savings Plans
Pension, Retiree Medical and Savings Plans
Our pension plans cover certain full-time employees in the U.S. and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. Certain U.S. and Canada retirees are also eligible for medical and life insurance benefits (retiree medical) if they meet age and service requirements. Generally, our share of retiree medical costs is capped at specified dollar amounts, which vary based upon years of service, with retirees contributing the remainder of the costs.
Gains and losses resulting from actual experience differing from our assumptions, including the difference between the actual return on plan assets and the expected return on plan assets, and from changes in our assumptions are determined at each measurement date. If this net accumulated gain or loss exceeds 10% of the greater of the market-related value of plan assets or plan liabilities, a portion of the net gain or loss is included in expense for the following year based upon the average remaining service period of active plan participants, which is approximately 11 years for pension expense and approximately 8 years for retiree medical expense. The cost or benefit of plan changes that increase or decrease benefits for prior employee service (prior service cost/(credit)) is included in earnings on a straight-line basis over the average remaining service period of active plan participants.
In connection with our acquisitions of PBG and PAS, we assumed sponsorship of pension and retiree medical plans that provide benefits to certain U.S. and international employees. Subsequently, during 2010, we merged the pension plan assets of the legacy PBG and PAS U.S. pension plans with those of PepsiCo into one master trust.
During 2010, the Compensation Committee of PepsiCo’s Board of Directors approved certain changes to the U.S. pension and retiree medical plans, effective January 1, 2011. Pension plan design changes included implementing a new employer contribution to the 401(k) savings plan for all future salaried new hires of the Company, as salaried new hires are no longer eligible to participate in the defined benefit pension plan, as well as implementing a new defined benefit pension formula for certain hourly new hires of the Company. Pension plan design changes also included implementing a new employer contribution to the 401(k) savings plan for certain legacy PBG and PAS salaried employees (as such employees are also not eligible to participate in the defined benefit pension plan), as well as implementing a new defined benefit pension formula for certain legacy PBG and PAS hourly employees. The retiree medical plan design change included phasing out Company subsidies of retiree medical benefits. As a result of these changes, we remeasured our pension and retiree medical expenses and liabilities in 2010, which resulted in a one-time pre-tax curtailment gain of $62 million included in retiree medical expenses.
In the fourth quarter of 2012, the Company offered certain former employees who have vested benefits in our defined benefit pension plans the option of receiving a one-time lump sum payment equal to the present value of the participant’s pension benefit (payable in cash or rolled over into a qualified retirement plan or IRA). In December 2012, we made a discretionary contribution of $405 million to fund substantially all of these payments. The Company recorded a pre-tax non-cash settlement charge of $195 million ($131 million after-tax or $0.08 per share) as a result of this transaction. See “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The provisions of both the PPACA and the Health Care and Education Reconciliation Act are reflected in our retiree medical expenses and liabilities and were not material to our financial statements.
Selected financial information for our pension and retiree medical plans is as follows:
 
 
Pension
 
Retiree Medical
 
U.S.
 
International
 
 
 
 
 
2012

 
2011

 
2012

 
2011

 
2012

 
2011

Change in projected benefit liability
 
 
 
 
 
 
 
 
 
 
 
Liability at beginning of year
$
11,901

 
$
9,851

 
$
2,381

 
$
2,142

 
$
1,563

 
$
1,770

Acquisitions/(divestitures)
—

 
11

 
—

 
(63
)
 
—

 
—

Service cost
407

 
350

 
100

 
95

 
50

 
51

Interest cost
534

 
547

 
115

 
117

 
65

 
88

Plan amendments
15

 
21

 
—

 
(16
)
 
—

 
3

Participant contributions
—

 
—

 
3

 
3

 
—

 
—

Experience loss/(gain)
932

 
1,484

 
200

 
224

 
(63
)
 
(239
)
Benefit payments
(278
)
 
(414
)
 
(76
)
 
(69
)
 
(111
)
 
(110
)
Settlement/curtailment
(633
)
 
(20
)
 
(40
)
 
(15
)
 
—

 
—

Special termination benefits
8

 
71

 
1

 
1

 
5

 
1

Foreign currency adjustment
—

 
—

 
102

 
(41
)
 
2

 
(1
)
Other
—

 
—

 
2

 
3

 
—

 
—

Liability at end of year
$
12,886

 
$
11,901

 
$
2,788

 
$
2,381

 
$
1,511

 
$
1,563

 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of plan assets
 
 
 
 
 
 
 
 
 
 
 
Fair value at beginning of year
$
9,072

 
$
8,870

 
$
2,031

 
$
1,896

 
$
190

 
$
190

Acquisitions/(divestitures)
—

 
11

 
—

 
(1
)
 
—

 
—

Actual return on plan assets
1,282

 
542

 
206

 
79

 
35

 
—

Employer contributions/funding
1,368

 
63

 
246

 
176

 
251

 
110

Participant contributions
—

 
—

 
3

 
3

 
—

 
—

Benefit payments
(278
)
 
(414
)
 
(76
)
 
(69
)
 
(111
)
 
(110
)
Settlement
(627
)
 
—

 
(33
)
 
(30
)
 
—

 
—

Foreign currency adjustment
—

 
—

 
86

 
(23
)
 
—

 
—

Fair value at end of year
$
10,817

 
$
9,072

 
$
2,463

 
$
2,031

 
$
365

 
$
190

Funded status
$
(2,069
)
 
$
(2,829
)
 
$
(325
)
 
$
(350
)
 
$
(1,146
)
 
$
(1,373
)
 
Pension
 
Retiree Medical
 
U.S.
 
International
 
 
 
 
 
2012

 
2011

 
2012

 
2011

 
2012

 
2011

Amounts recognized
 
 
 
 
 
 
 
 
 
 
 
Other assets
$
—

 
$
—

 
$
51

 
$
55

 
$
—

 
$
—

Other current liabilities
(51
)
 
(91
)
 
(2
)
 
(1
)
 
(71
)
 
(124
)
Other liabilities
(2,018
)
 
(2,738
)
 
(374
)
 
(404
)
 
(1,075
)
 
(1,249
)
Net amount recognized
$
(2,069
)
 
$
(2,829
)
 
$
(325
)
 
$
(350
)
 
$
(1,146
)
 
$
(1,373
)
 
 
 
 
 
 
 
 
 
 
 
 
Amounts included in accumulated other comprehensive loss (pre-tax)
 
 
 
 
 
 
 
 
Net loss/(gain)
$
4,212

 
$
4,217

 
$
1,096

 
$
977

 
$
(44
)
 
$
32

Prior service cost/(credit)
121

 
122

 
(3
)
 
(2
)
 
(92
)
 
(118
)
Total
$
4,333

 
$
4,339

 
$
1,093

 
$
975

 
$
(136
)
 
$
(86
)
 
 
 
 
 
 
 
 
 
 
 
 
Components of the (decrease)/increase in net loss/(gain) included in accumulated other comprehensive loss
 
 
 
 
Change in discount rate
$
776

 
$
1,710

 
$
188

 
$
302

 
$
84

 
$
115

Employee-related assumption changes
135

 
(140
)
 
(2
)
 
(51
)
 
(67
)
 
(125
)
Liability-related experience different from assumptions
66

 
(85
)
 
14

 
(27
)
 
(80
)
 
(210
)
Actual asset return different from expected return
(486
)
 
162

 
(60
)
 
57

 
(13
)
 
14

Amortization and settlement of losses
(451
)
 
(147
)
 
(64
)
 
(55
)
 
—

 
(12
)
Other, including foreign currency adjustments
(45
)
 
(9
)
 
43

 
(16
)
 
—

 
(20
)
Total
$
(5
)
 
$
1,491

 
$
119

 
$
210

 
$
(76
)
 
$
(238
)
 
 
 
 
 
 
 
 
 
 
 
 
Liability at end of year for service to date
$
11,643

 
$
11,205

 
$
2,323

 
$
1,921

 
 
 
 


The components of benefit expense are as follows:
 
 
Pension
 
Retiree Medical
 
U.S.
 
International
 
 
 
 
 
 
 
2012

 
2011

 
2010

 
2012

 
2011

 
2010

 
2012

 
2011

 
2010

Components of benefit expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
407

 
$
350

 
$
299

 
$
100

 
$
95

 
$
81

 
$
50

 
$
51

 
$
54

Interest cost
534

 
547

 
506

 
115

 
117

 
106

 
65

 
88

 
93

Expected return on plan assets
(796
)
 
(704
)
 
(643
)
 
(146
)
 
(136
)
 
(123
)
 
(22
)
 
(14
)
 
(1
)
Amortization of prior service cost/(credit)
17

 
14

 
12

 
1

 
2

 
2

 
(26
)
 
(28
)
 
(22
)
Amortization of net loss
259

 
145

 
119

 
53

 
40

 
24

 
—

 
12

 
9

 
421

 
352

 
293

 
123

 
118

 
90

 
67

 
109

 
133

Settlement/curtailment loss/(gain) (a)
185

 
(8
)
 
(2
)
 
4

 
30

 
1

 
—

 
—

 
(62
)
Special termination benefits
8

 
71

 
45

 
1

 
1

 
3

 
5

 
1

 
3

Total
$
614

 
$
415

 
$
336

 
$
128

 
$
149

 
$
94

 
$
72

 
$
110

 
$
74


(a)
Includes pension lump sum settlement charge of $195 million in 2012. This charge is reflected in items affecting comparability (see “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations).





The estimated amounts to be amortized from accumulated other comprehensive loss into expense in 2013 for our pension and retiree medical plans are as follows:
 
Pension
 
Retiree Medical
 
U.S.
 
International
 
 
Net loss
$
289

 
$
68

 
$
1

Prior service cost/(credit)
18

 
1

 
(22
)
Total
$
307

 
$
69

 
$
(21
)

The following table provides the weighted-average assumptions used to determine projected benefit liability and benefit expense for our pension and retiree medical plans:
 
 
Pension
 
Retiree Medical
 
U.S.
 
International
 
 
 
 
 
 
 
2012

 
2011

 
2010

 
2012

 
2011

 
2010

 
2012

 
2011

 
2010

Weighted-average assumptions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liability discount rate
4.2
%
 
4.6
%
 
5.7
%
 
4.4
%
 
4.8
%
 
5.5
%
 
3.7
%
 
4.4
%
 
5.2
%
Expense discount rate
4.6
%
 
5.7
%
 
6.0
%
 
4.8
%
 
5.5
%
 
6.0
%
 
4.4
%
 
5.2
%
 
5.8
%
Expected return on plan assets
7.8
%
 
7.8
%
 
7.8
%
 
6.7
%
 
6.7
%
 
7.1
%
 
7.8
%
 
7.8
%
 
7.8
%
Liability rate of salary increases
3.7
%
 
3.7
%
 
4.1
%
 
3.9
%
 
4.1
%
 
4.1
%
 
 
 
 
 
 
Expense rate of salary increases
3.7
%
 
4.1
%
 
4.4
%
 
4.1
%
 
4.1
%
 
4.1
%
 
 
 
 
 
 

The following table provides selected information about plans with liability for service to date and total benefit liability in excess of plan assets: 
 
Pension
 
Retiree Medical
 
U.S.
 
International
 
 
 
 
 
2012

 
2011

 
2012

 
2011

 
2012

 
2011

Selected information for plans with liability for service to date in excess of plan assets
 
 
 
 
Liability for service to date
$
(11,643
)
 
$
(11,205
)
 
$
(711
)
 
$
(471
)
 
 
 
 
Fair value of plan assets
$
10,817

 
$
9,072

 
$
552

 
$
344

 
 
 
 
Selected information for plans with projected benefit liability in excess of plan assets
 
 
 
 
 
 
Benefit liability
$
(12,886
)
 
$
(11,901
)
 
$
(2,542
)
 
$
(2,191
)
 
$
(1,511
)
 
$
(1,563
)
Fair value of plan assets
$
10,817

 
$
9,072

 
$
2,166

 
$
1,786

 
$
365

 
$
190


Of the total projected pension benefit liability at year-end 2012, $761 million relates to plans that we do not fund because the funding of such plans does not receive favorable tax treatment.
Future Benefit Payments and Funding
Our estimated future benefit payments are as follows: 
 
2013

 
2014

 
2015

 
2016

 
2017

 
2018-22

Pension
$
560

 
$
570

 
$
600

 
$
650

 
$
705

 
$
4,465

Retiree medical(a)
$
120

 
$
125

 
$
125

 
$
130

 
$
130

 
$
655

 
(a)
Expected future benefit payments for our retiree medical plans do not reflect any estimated subsidies expected to be received under the 2003 Medicare Act. Subsidies are expected to be approximately $13 million for each of the years from 2013 through 2017 and approximately $90 million in total for 2018 through 2022.
These future benefits to beneficiaries include payments from both funded and unfunded plans.
In 2013, we expect to make pension and retiree medical contributions of approximately $240 million, with up to approximately $17 million expected to be discretionary. Our contributions for retiree medical are estimated to be approximately $70 million in 2013.
Plan Assets
Pension
Our pension plan investment strategy includes the use of actively managed securities and is reviewed periodically in conjunction with plan liabilities, an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. Our investment objective is to ensure that funds are available to meet the plans’ benefit obligations when they become due. Our overall investment strategy is to prudently invest plan assets in a well-diversified portfolio of equity and high-quality debt securities to achieve our long-term return expectations. Our investment policy also permits the use of derivative instruments which are primarily used to reduce risk. Our expected long-term rate of return on U.S. plan assets is 7.8%. Our target investment allocations are as follows:
 
2013

 
2012

Fixed income
40
%
 
40
%
U.S. equity
33
%
 
33
%
International equity
22
%
 
22
%
Real estate
5
%
 
5
%

Actual investment allocations may vary from our target investment allocations due to prevailing market conditions. We regularly review our actual investment allocations and periodically rebalance our investments to our target allocations.
The expected return on pension plan assets is based on our pension plan investment strategy and our expectations for long-term rates of return by asset class, taking into account volatility and correlation among asset classes and our historical experience. We also review current levels of interest rates and inflation to assess the reasonableness of the long-term rates. We evaluate our expected return assumptions annually to ensure that they are reasonable. To calculate the expected return on pension plan assets, our market-related value of assets for fixed income is the actual fair value. For all other asset categories, we use a method that recognizes investment gains or losses (the difference between the expected and actual return based on the market-related value of assets) over a five-year period. This has the effect of reducing year-to-year volatility.
Our pension contributions for 2012 were $1,614 million, of which $1,375 million was discretionary. Discretionary contributions included $405 million pertaining to pension lump sum payments.
Retiree Medical
In 2012 and 2011, we made non-discretionary contributions of $111 million and $110 million, respectively, to fund the payment of retiree medical claims. In 2012, we made a discretionary contribution of $140 million to fund future U.S. retiree medical plan benefits. This contribution was invested consistently with the allocation of existing assets in the U.S. pension plan.
Fair Value
The guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
Plan assets measured at fair value as of fiscal year-end 2012 and 2011 are categorized consistently by level in both years, and are as follows: 
 
2012
 
2011
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. plan assets*
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
U.S. common stock(a)
$
626

 
$
626

 
$
—

 
$
—

 
$
514

U.S. commingled funds(b)
3,106

 
—

 
3,106

 
—

 
3,003

International common stock(a)
1,597

 
1,597

 
—

 
—

 
1,089

International commingled fund(c)
948

 
—

 
948

 
—

 
776

Preferred stock(d)
20

 
—

 
20

 
—

 
19

Fixed income securities:
 
 
 
 
 
 
 
 
 
Government securities(d)
1,287

 
—

 
1,287

 
—

 
1,032

Corporate bonds(d) (e)
2,962

 
—

 
2,962

 
—

 
2,653

Mortgage-backed securities(d)
110

 
—

 
110

 
—

 
24

Other:
 
 
 
 
 
 
 
 
 
Contracts with insurance companies(f)
27

 
—

 
—

 
27

 
24

Real estate commingled funds(g)
331

 
—

 
—

 
331

 
—

Cash and cash equivalents
117

 
117

 
—

 
—

 
78

Sub-total U.S. plan assets
11,131

 
$
2,340

 
$
8,433

 
$
358

 
9,212

Dividends and interest receivable
51

 
 
 
 
 
 
 
50

Total U.S. plan assets
$
11,182

 
 
 
 
 
 
 
$
9,262

International plan assets
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
U.S. commingled funds(b)
$
278

 
$
—

 
$
278

 
$
—

 
$
246

International commingled funds(c)
863

 
—

 
863

 
—

 
729

Fixed income securities:
 
 
 
 
 
 
 
 
 
Government securities(d)
202

 
—

 
202

 
—

 
171

Corporate bonds(d)
230

 
—

 
230

 
—

 
196

Fixed income commingled funds(h)
600

 
—

 
600

 
—

 
530

Other:
 
 
 
 
 
 
 
 
 
Contracts with insurance companies(f)
35

 
—

 
—

 
35

 
30

Currency commingled funds(i)
64

 
—

 
64

 
—

 
52

Real estate commingled fund(g)
60

 
—

 
—

 
60

 
56

Cash and cash equivalents
125

 
125

 
—

 
—

 
16

Sub-total international plan assets
2,457

 
$
125

 
$
2,237

 
$
95

 
2,026

Dividends and interest receivable
6

 
 
 
 
 
 
 
5

Total international plan assets
$
2,463

 
 
 
 
 
 
 
$
2,031


(a)
Based on quoted market prices in active markets.
(b)
Based on the fair value of the investments owned by these funds that track various U.S. large, mid-cap and small company indices. Includes one large-cap fund that represents 25% and 30%, respectively, of total U.S. plan assets for 2012 and 2011.
(c)
Based on the fair value of the investments owned by these funds that track various non-U.S. equity indices.
(d)
Based on quoted bid prices for comparable securities in the marketplace and broker/dealer quotes that are not observable.
(e)
Corporate bonds of U.S.-based companies represent 22% and 24%, respectively, of total U.S. plan assets for 2012 and 2011.
(f)
Based on the fair value of the contracts as determined by the insurance companies using inputs that are not observable.
(g)
Based on the appraised value of the investments owned by these funds as determined by independent third parties using inputs that are not observable.
(h)
Based on the fair value of the investments owned by these funds that track various government and corporate bond indices.
(i)
Based on the fair value of the investments owned by these funds. Includes managed hedge funds that invest primarily in derivatives to reduce currency exposure.
*
2012 and 2011 amounts include $365 million and $190 million, respectively, of retiree medical plan assets that are restricted for purposes of providing health benefits for U.S. retirees and their beneficiaries.
The change in Level 3 plan assets for 2012 is as follows:
 
Balance, End of 2011
 
Return on Assets Held at Year End
 
Return on Assets Sold
 
Purchases and Sales, Net
 
Balance, End of 2012
Real estate commingled funds
$
56

 
$
15

 
$
1

 
$
319

 
$
391

Contracts with insurance companies
54

 
9

 
—

 
(1
)
 
62

Total
$
110

 
$
24

 
$
1

 
$
318

 
$
453


Retiree Medical Cost Trend Rates
An average increase of 7% in the cost of covered retiree medical benefits is assumed for 2013. This average increase is then projected to decline gradually to 5% in 2020 and thereafter. These assumed health care cost trend rates have an impact on the retiree medical plan expense and liability. However, the cap on our share of retiree medical costs limits the impact. In addition, as of January 1, 2011, the Company started phasing out Company subsidies of retiree medical benefits. A 1-percentage-point change in the assumed health care trend rate would have the following effects:
 
1% Increase
 
1%
Decrease
2012 Service and interest cost components
$
4

 
$
(4
)
2012 Benefit liability
$
40

 
$
(38
)

Savings Plan
Certain U.S. employees are eligible to participate in 401(k) savings plans, which are voluntary defined contribution plans. The plans are designed to help employees accumulate additional savings for retirement, and we make Company matching contributions on a portion of eligible pay based on years of service.
In 2010, in connection with our acquisitions of PBG and PAS, we also made Company retirement contributions for certain employees on a portion of eligible pay based on years of service.
As of January 1, 2011, a new employer contribution to the 401(k) savings plan became effective for certain eligible legacy PBG and PAS salaried employees as well as all eligible salaried new hires of PepsiCo who were not eligible to participate in the defined benefit pension plan as a result of plan design changes approved during 2010. In 2012 and 2011, our total Company contributions were $109 million and $144 million, respectively.
As of February 2012, certain U.S. employees earning a benefit under one of our defined benefit pension plans were no longer eligible for the Company matching contributions on their 401(k) contributions.
For additional unaudited information on our pension and retiree medical plans and related accounting policies and assumptions, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.